As the recent crisis has shown, real estate, the world over, is not only an important indicator of the financial health of a country but also one of its main instruments. For the past couple of weeks I have had ample time to reflect on the state of the property market in Mongolia and more specifically Ulaanbaatar. What impact will it have on the economy at large and how will the market move in the next few years? This reflection is of course fueled by a consideration of what actions I should take for my own property portfolio, is it better to cash out and seek new investments or remain in the market and wait for the longer term benefits?

This week will probably turn out be one of the most eventful and important weeks for the Ulaanbaatar Real Estate market, in exactly seven days, the deadline set by the government for the signature of the Oyu Tolgoi project runs out. The long awaited signature of this agreement is expected to have a wide ranging impact on all the various industries of Mongolia.  Due to its small size (not geographic but in terms of economy as well as population), this project alone could give an enormous boost to what has now become a mostly lethargic economy.

As Peter Morrow, CEO of Khan Bank declared at the recent Euromoney Conference, Mongolia has remained largely unscathed by the world financial crisis but was hit hard by the subsequent commodity crisis. Due to its lack of exposure to the global financial markets, it had little to lose, the real hit came when the price of copper (Mongolia’s single largest export) collapsed from 9,000USD a ton to 3,000USD a ton in little over 5 months. This greatly impacted the unprepared Mongolian economy: foreign investments dried up, GDP growth collapsed; the national currency became unstable, national reserves dwindled, large companies went into administration, construction projects screeched to a halt, banks stopped lending and most property prices fell between 20 to 50% of what they use to be.

Not all property prices fell. Some sectors not only remained stable but appreciated in value, for example the high end prices have remained generally stable while properties that benefit from an excellent location and middle to high end pricing have gained in value as they are considered a safer investment. The demand for quality properties has not dropped (if at all) as fast as the supply has. Not everyone in the Mongolian economy was hit equally hard, indeed some benefited handsomely from the crisis.

Since the last winter, cautious optimism in the economy has grown; property prices have slowly risen again even if they are still a far cry from their pre-crisis levels. Will the imminent signature of the Oyu Tolgoi Investment Agreement signal the start of the Mongolian Property Boom (Version 2.0 Beta)?

The signature of the agreement will not only bring in the associated investments by Rio Tinto and Ivanhoe Mines, which is considerable at 5$bn (equivalent to current GDP levels), but also create a strong supply chain with its own capital investments. This means more expats on the ground, more money circulating in the economy and a subsequent boom in all mining related businesses. As the economy explodes, it is likely that the property market will follow. A large number of expat families are expected to relocate to Mongolia within 6 months of the signature, foreign companies currently waiting on the sidelines, will finally make their long awaited investments in Mongolia. The combined effect of those investments will undoubtedly affect the demand of real estate; more office space will be required by companies, new comfortable apartments will be needed for expat families not to mention the increasing need for hotels, restaurants and shops.

Demand will of course not only be driven by the expat market along with its foreign direct investments, the bulk of the new demand will come from the increasingly wealthy Mongolian middle class, they are the end user and the main players in this market, it is their new found wealth that will dictate the property prices of the majority of the market. As Mongolian commercial banks recover and mortgages are once again available, the market will gradually move from cash only purchases to mortgage driven acquisitions, thereby making house ownership affordable to a larger segment of the domestic market.

While the levels of demand are expected to increase exponentially, there will be an equally distinct lack of new supply, the vast majority of construction projects that began pre-crisis have been abandoned due to a lack of financing from the banks coupled with falling demand, it will take at least two to three years before we experience again a consistent supply of new properties on the market. This supply is not only limited by financial constraints, by the harsh weather conditions (which limits the available construction time) but also by the lack of available buildable land.

When the Soviets built Ulaanbaatar in the early 1950’s, it was designed to accommodate a relatively small population, since then the population of the city has greatly expanded but investments made in the infrastructure of the city has been lagging behind, this means that land which has access to the city infrastructure is strictly limited to the city center and a few outlying suburbs. With no serious Government commitment to infrastructure development predicted in the near future, buildable land will command an even greater premium and property prices will rise accordingly.

All of this is pointing towards a new explosion of property prices within Ulaanbaatar, but surely in such a buoyant market as Ulaanbaatar, there are other investment opportunities that can prove to be more exciting and indeed rewarding?

Over the past 5 years, I have been fortunate enough to work in a wide spectrum of industries; cashmere,  restaurants, tourism, fire safety and of course property to name but a few. While every investment in Mongolia can be made profitable, it is my strong opinion that there is no better business in Mongolia than Real Estate.

Every business should try to minimize its exposure to external risks such as government intervention, reliance on licensing, “favours” from officials (a.k.a. corruption), the need to enter into partnerships with Mongolian entities and its vulnerability to changes in unstable taxes and laws aimed at discriminating against foreign investors. Mining is clearly a business that has a high level of exposure to all of the above, property, on the other hand, has none of those external risks. Foreign investors in Mongolia can own their property 100% as freehold properties, do not need to go into a partnership with any Mongolian entity, have no restrictions on the movement of capital and benefit from very low tax levels. More importantly, Mongolian and foreign investors are treated as equals under Mongolian law.

Despite its recent drop in value, property remains a strong and stable asset in times of crisis, an asset that will (nearly) always appreciate in the longer term while providing recurring rental income for minimal involvement in terms of management. In short, it presents low risks with medium to high levels of returns. The currently undervalued prices present an unparalleled opportunity for cash rich investors to get into the game before it’s too late. There is a limited window of opportunity for the next two years when the demand for quality property will in by far outstrip the supply and the returns on investments are likely to become phenomenal.

How far can prices go? Well, it is as always a case of demand versus supply, a glass of fresh water in the Gobi desert is worth infinitely more than it is in Paris. In the short term, prices will rise, the longer term outlook will depend on supply but a double digit GDP growth a year, a nascent mortgage market along with a growing urban population can only push prices one way, up.

While I do need to sell some property over the next few months to fund some upcoming expenses (MBA School) it is clear that it is in my interest to retain as much real estate in Ulaanbaatar as I can. I have never seen another country with such potential for growth and above average returns as Mongolia.

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Article published by Chris de Gruben

It could easily be argued that Mongolia was one of the first nations to develop today’s concept of globalization; the free exchange of ideas, products and concepts across borders with few restriction.

The mighty Mongol army not only conquered the better part of the known world but they also embraced and developed the cultures that they came across. Under the Mongols, new technologies, various commodities and ideologies were disseminated and exchanged across Eurasia.  Mongols were highly tolerant of most religions, and typically sponsored several at the same time. At the time of Genghis Khan, virtually every religion had found converts in its capital city of Karakorum.

The armies of Chinggis Khaan not only revolutionized strategic warfare but also understood that survival and growth came in the exchange and adaptation of ideas, trade and concepts. The Mongol administration pioneered the use of a fast postal service, the introduction of a writing system and created a fair judicial system. European travelers were often amazed by the organization, freedom of trade and strict discipline of the people within the Mongol Empire.

It is thus ironic that the Mongolian Empire so quickly faded from world view and Mongolia slowly became one of the most isolated and least understood lands in the world until the early 1990’s when the communist system collapsed.

It is now awakening (with a jolt) from that deep commercial slumber and making up time. Over the past 5 years , there has already been tremendous visible change, new shops open every week, restaurants come and go, virtually every product is now available in UB and more arrive all the time. The level and quality of services are improving at a fast rate, a few years ago, a Subway style sandwich shop such as Sub’baatar would have been unthinkable and yet here it is today.

Despite all the criticism Mongolia is getting in the international press, it is one of the only true functioning democracies in Asia, with freedom of speech, a fair judicial system and a rule of law. While there is currently a strong rebirth of the Chinggis Khan cult, forbidden during the soviet period, this is merely a demonstration of the national pride and awareness that is quickly awakening. Mongolia is getting ready to take part in world affairs once more. It is an exciting time to be here, it is a time of intense change.

But where does the average Mongolian nomad fit in this new world order? Have they been left behind? There has of course been heavy urbanization in Mongolia over the recent years, a lot of young urban residents are the first generation of their family to be born or to grow up in the city, it is likely that over the next few years, there will be a growing divide between town and country but it always seem to me that the young Mongolian urbanites never quite forget their roots in the countryside and often go back to it in search of their identity. Mongolians will always be nomads at heart and retain a strong attachement for the countryside, is that enough to sustain it economically?

Even the nomad in the darkest depths of the country is accepting and often embracing his new commercial reality. The price he sells his cashmere, buys his petrol or the taxes he pays are all dictated by international markets and their fluctuations. It is the new path that Mongolia has embarked on and the majority of its population is playing the game of international trade and commerce.

With the “soon to be opening” Louis Vuitton Store in Ulaanbaatar, it is a renewed chapter in its globalization history that Mongolia is opening but I sincerely hope that, in these turbulent times of its history, Mongolia will control how its identity is shifting and changing. Change to Mongolia and its population is inevitable, I only hope that globalization in this case will still be working both ways, Mongolia has much to learn from the world but at the same time the world has much to learn from Mongolia.

The question must also be asked of why is Louis Vuitton in Ulaanbaatar, is there a sufficiently sized market to justify it commercially or is it merely a question of “ethnic branding”, are they planning to launch a Mongolian cashmere range? Or is it merely good PR to be omnipresent and display a retail location in every Asian capital (with the  possible exception of Pyongyang).

Furthermore, will this new shop be part of a wave of international chains opening retail locations in Ulaanbaatar? Will it be a catalyst for not only luxury household names but also different brands such as GAP or Banana republik and financial services such as HSBC? Maybe some restauration networks such as Outback Steakhouse or Starbucks coffee will be enticed to come to Mongolia, maybe even big distribution network such as carrefour or Tesco could find sufficient markets to justify starting Mongolian operations.

Already Mongolia has an impressive number of international brands with Adidas, Mercedes Benz, Dior, Esprit, Swarovski, BMW, Landrover, Lavazzia and many more.. A hilton and a Shangri La hotels are scheduled to open in UB in the next few years.

I, for one, look forward to seeing the changed landscape of UB and Mongolia in a few years from now and I will look for Mongolia’s influence in the region and the wider world.